Following allegations of irregularities in his campaign spending, Penashue announced on March 14, 2013 that he would resign his seat and run again as a candidate in a new by-election.[3][4] In the resulting by-election, held on May 13, 2013, he was defeated by Yvonne Jones of the Liberal Party.[5]

Penashue assumed a number of leadership roles in the Labrador Innu community, from Land Claims Director, Executive Director and Financial Administrator with the Naskapi Montagnais Innu to Grand Chief of the Innu Nation.

Penashue was elected President of the Innu Nation at the age of 26, and served as Grand Chief of the Innu Nation, for twelve years, from 1990 to 1997 and 1999 to 2004, and was the driving force behind the negotiation of the impacts-benefit agreement between the Innu Nation and the Voisey's Bay Nickel Company. He was also elected to the position of Deputy Grand Chief of the Innu Nation in Sheshatshiu in 2007 and stepped down on March 9, 2010.[6]

Penashue was elected to the House of Commons of Canada in the Canadian federal election, 2011, in the riding of Labrador. Penashue's challenger, Liberal incumbent Todd Russell, had originally been declared by the media as retaining his seat early on election night but after the last five polls were counted Penashue overtook Russell and was ultimately declared the winner.[7] Penashue's original margin of victory of 231 votes was reduced to 79 votes on recount.[8]

Penashue's campaign took 28 ineligible campaign contributions totaling $27,850 in cash and $18,710 in in-kind contributions from Provincial Airlines for services provided. Elections Canada deemed the contributions ineligible and Penashue's campaign was forced to pay $26,850 on November 28, 2012 and $18,710 on March 4, 2013 to the Receiver General of Canada.

After the 2011 election the Peneshue campaign had $4000 but still owed $15,000 from a $25,000 zero interest loan to the Innu Development Limited Partnership, a firm managed by his brother-in-law, Paul Rich. Interest free loans are not allowed by Canadian election law. In November 2012 The Conservative Party transferred $30,000 to the campaign and a further $14,350 on March 1, 2013.[4][10][11]